If Congress needed any extra incentive to work on fixes for federal budget deficits, it got one Wednesday in the form of a stark warning from its own accountant.

The Congressional Budget Office issued its annual long-term outlook for federal finances, and the overall message is simple: The problem of deficits and fast-rising debt is large, if anything even larger than the official forecast implies.

The challenge isn't impossible to fix, the CBO said. But delay will only make the problems worse.

Many members of Congress are already trying to address the issue, with bipartisan talks chaired by Vice President Joe Biden continuing this week. The goal is to reach consensus on a plan to raise the debt limit while also significantly reducing future federal deficits.

It's getting toward crunch time in those deficit talks, with both sides pressing to find as much as $2.4 trillion in deficit reduction (spread over the next decade), by early July. Congress needs to draft legislation and approve it by early August to avoid having the Treasury run out of cash.

Headed the wrong direction

Although the CBO's basic story line isn't new, this year's report finds that the outlook for the national debt now looks a bit worse than it did a year ago.

"By the end of this year, CBO projects, federal debt will reach roughly 70 percent of gross domestic product (GDP) – the highest percentage since shortly after World War II," Douglas Elmendorf, the director of the nonpartisan agency, said in a blog post accompanying the report. And "with the aging of the population and growing health care costs, the budget outlook, for both the coming decade and beyond, is daunting."

A status-quo policy course, in which a retirement wave pushes Medicare and Social Security costs up while tax revenues remain flat, would cause debt to grow rapidly, "reaching levels far above any ever experienced in US history," Mr. Elmendorf warned. A chart shows public debt nearing 200 percent of GDP – and rising fast – as of 2035.

If anything, the CBO report understates the severity of the long-term problem, he added. That's because key conclusions don't attempt to gauge the likely negative effects of rising debt would have on the economy. Large budget deficits and growing debt would reduce national saving, leading to higher interest rates, more foreign borrowing, and less domestic investment.

Growing debt would also raise the probability of a sudden debt crisis and leave policymakers with fewer options for responding to such a crisis, Elmendorf said.

Congress engaged

Congress is keenly focused on the fiscal outlook now, for a couple of reasons.

First, the public doesn't like the idea of more US borrowing, now that the Treasury has reached its current statutory limit of about $14.3 trillion. (That figure includes both debt issued to public investors and debts owed from one part of government to another.)

Second, the performance of the economy is at stake. Federal deficits have been running near historic highs in the wake of a severe recession. Republicans argue that reducing federal spending is vital to restoring economic health. But many economists warn that, if Congress cuts too quickly, the move could harm economic activity in the near term.

Elmendorf noted the challenge.

Failing to address the fiscal problems at all would substantially reduce the nation's rate of economic growth over the long run, the CBO warned. Central options include spending cuts, tax hikes, or some mix of those strategies.

"Making such changes while economic activity and employment remain well below their potential levels would probably slow the economic recovery," Elmendorf wrote. "However, the sooner that medium- and long-term changes to tax and spending policies are agreed on, and the sooner they are carried out once the economy recovers, the smaller will be the damage to the economy from growing federal debt."